European Fears: Deflation

European leaders may have felt a momentary brief lapse in the wary feeling of disdain that has existed between them for years now, but that was once exacerbated by the financial crisis and the entire PIGS- story that ensued, with the debt crisis. But the moment was fleeting as they sat round tables and spoke via special diplomatic communiqués as to what they should do (or not do, as the case may be) over the arch–enemy to that myth that is called ‘democracy’, Vladimir Putin. But, all of that was fleeting, secondary, peripheral and unlasting. They have greater divisional problems over the horizon and this time it’s the fear of deflation. It won’t be a fleeting moment, but a fleeing moment for them to leave the EU.

Eurozone inflation has now fallen to an all-time low for the past 52 months (March 2014) and this is now increasing the pressure that the European Central Bank will be forced to act to keep deflation at bay. There will be a Monetary Policy Meeting that is going to take place on Thursday April 3rd.

• Consumer prices increased by 0.5% year-on-year in March as shown in figures released today by Eurostat. • Core inflation dropped to 0.8%.• It had previously stood at 1%• Analysts had expected it to be at 0.6%• The rise was 0.7% in February.• As a consequence, the Euro immediately fell this morning against the Dollar; although it did get back the ground that had been lost by early morning.• It is currently 0.26% up, standing at S1.3788.

Consumerprices have risen therefore at their slowest pace since November 2009. The European Central Bank has a current target of 2%. The figures are now fuelling fears that deflation is only round the corner and whatever happens the European Central Bank will not be able to change the onset of that pressure on the economy. There have been warnings now that the EU risks deflationary pressure in its economies for months now.

Is the EU drifting towards deflation (Japanese –style)? Probably. At least, it looks like that. Just a few days ago, figures announced showed that Spain had falls in its prices and inflation was edging down in Germany. 10-year government bonds in Portugal (moving inversely with prices) dropped under 4% and that was the first time in four years.

Even before the figures that have just been released the pressure was on at the ECB with radical action to counter the problem needed. It is doubtful if the ECB will unveil any plans however immediately regarding a bond-buying program. But, there is increasing likelihood that quantitative easing is in sight right now. Economists are now saying that the ECB will have no other choice than to go down the long and lonely path of easy money. What the US did, Europe does and follows suit…later, but they end up doing it all the same. Get the printing presses rolling!

If Spain, which seems to be the most worrying case at the moment, has a high risk of deflation while it is trying to gain some competitiveness through maintaining lower wages, then procrastination by the ECB will not be the perfect answer to the problem. The country as all of Europe is laboring under heavy debt and public sector debt there is about 200% of GDP. Spain also has until 2016 to get its deficit under 3% (as imposed by Brussels). Figures released show that it has already missed the target of 6.5% today (standing at 6.6%). Deflation can only make things worse.

If they don’t do anything and Draghi turns into Dragh-ing on with the decision-making over deflation, then people will stop buying hoping that prices will decrease even further, which is what will happen…and so the circle, vicious as it is, continues its cycle. Unemployment figures will be published tomorrow and that may influence the ECB too.

Europe is sleepwalking into catastrophe and neither the European Central Bank or the Merkels and the Hollandes and certainly not the Camerons of this struck Union will be able to get themselves out of the predicament that they have gotten themselves into. Goodbye Europe and hello deflation. But the UK is still rejoicing that the minimum-wage increases will outstrip inflation for the next few years, “provided the economy continues to improve” (to use the words of the UK’s Low Pay Commission chairman, David Norgrove). Not certain that we have the same definition of “continues to improve” and secondly it’s hardly difficult to outstrip inflation when it turns into deflation. But bring on the deflation, rejoice, and come all ye faithful. Quantitative Easing is on its way. The markets will be rejoicing.

Thanks pivot for this thoughtful article. If it is so obvious that Europe needs an american-style QE to stop deflation than they want or really don't fear it? Besides with deflation its more about selling out rather than waiting to buy!

Its the Swiss who have la problema? Artificially supporting euro/franc cross to make its exports to EU competitive? A QE would be pointless! All Europe needs to do is lower rates and make Swiss trade yield less or wait for more dollar strength or more gold selling?

My own thoughts exactly. Inflation/deflation have impact only when the rates go very high and/or they continue for a long time. But nobody is going to not spend just because the cost might be 2% or even 5% lower next year.

Deflation is great for people on regular modest pay and for savers. It's terrible for those who borrows heavily to purchase assets. Guess which group controls the system? I also believe that regular inflation is necessary to sustain the Ponzi scheme and the whole central bank control system.

Deflation kills those who have lots of debt. It is the enemy of leverage. It is the only way to get a system reset in this messed up financial drunken binge that we are on. It is brought about when borrowings are used solely to keep up with interest due. It accelerates as defaults happen - a ponzi-driven domino effect. For hyper-inflation to happen instead, money creation (hell-oooooo QE and reverse-Repos) must outstrip the hole created by the increasing defaults. At some point, it has to become so blatant and obvious that rational individuals no longer want to have the currency in any form and this leads to the hyper-inflation.

Inflation of any kind is the enemy of the creditor and the saver. Prices move before wages and it eats away at the purchasing power of those who depend on a wage. Those who have leveraged productive assets rejoice in inflation because prices move before wages.

Deflation is the friend of the working class and the saver. Cash is king. Remember: Prices move before wages. Deflation is wonderful for those who depend on a living wage.

Although nominally, the price of productive assets remain the same, their intrinsic value remains unchanged. Land, mines, factories that provide necessities are all desirable in deflation (provided one did not leverage up on inflation-driven debt to acquire or expand these productive assets). However, real margins decline because prices move before wages. Debt does not change - leverage rises inherently until default. This re-inforces the deflation cycle.

T he Euro; a mule, a race horse, and an Ox joked together at the necks to pull a plow; I ask you, does this make any sense? Invented in the frist place by a French Socialist and his buddy from Belgium to avoid the periodic embarrasment to the French Frank by the D. Mark; it was a crack pot experiment to begin with. And now, France; France, mind you; will be asking for further patience from their "partners" in this mad race to hell; as they are un-able to meet the standards of Debt. to GDP; that are required to join the fucking thing. Meanwhile, we can all join in singing "happy days are here again, "; or what have you. I give up.

Spain also has to worry about territorial deflation when Catalonia goes independent. Here in the Deflationists Lounge we wonder if Deflation might also be to blame for the recent territorial deflation in the Ukraine. Viva 'le Quebec Deflation! (Is it really possible the French have not coined their own word for Deflation???)

Sorry to disagree - but deflation slowly chokes those who are leveraged in their productive assets (and non-productive assets such as art). If one has a lot of money - cash is king baby! Precious metals seem to hold their own. those who aren't leveraged but still have productive assets may find themselves squeezed even slower - especially those whose assets are for producing 'wants' not 'needs'.

Wage earners do well over time since prices move before wages (defation = fall). In the last Great Depression, those who had jobs did very well, thank you. Deflation can help bring about a system reset, which is so needed before an economy can grow again. Growth by debt is death by slavery. To think that pulling production forward from the future via the insane transformation of debt into money is, well, insnae.

If .gov can keep their sticky fingers out of the till, eventually sanity will return to capital allocation through saving and there should be better allocation to production. malinvestment (all that leveraged and paper asset boondoggle we are in) will die by virtue of the fact that it doesn't make economic sense unless interest rates remain low and inflation is rampant.